Hong Kong Sourcing Companies Prepare for Challenges

Diversification has been the mantra of Hong Kong's sourcing companies for years and, with recent developments in China, that policy is looking even wiser.

HONG KONG — Diversification has been the mantra of Hong Kong's sourcing companies for years and, with recent developments in China, that policy is looking even wiser.

In recent weeks and months, with news of stranded migrant workers over Chinese New Year, factory closures, labor shortages and increased costs, China's attractiveness as a manufacturing center took a hit.

"Costs in China have gone up dramatically," said Bruce Rockowitz, president of Li & Fung Ltd., which has production centers in 40 countries around the world. "We have been talking about this for three years. China's whole export business was centered in what is now the most expensive place in China...and at the same time you have all the commodities prices going up, labor costs going up dramatically and the government not really favoring this industry in the place where it's at because it's polluting. It's not efficient growth and they are [concerned about] the trade deficit with the United States."

More than any external forces enticing businesses away from China's manufacturing base in the south, it is the Chinese government that is pushing factories to move. With new airports in place across the country and the highway system rapidly developing, China feels it's time for the interior provinces to take over manufacturing, which would address employment imbalance in the country and cut down on the need for a migrant workforce.

After the chaotic scenes of Chinese New Year, the workforce may be accelerating the move as workers find manufacturing jobs with almost equal pay in their hometowns. The Federation of Hong Kong Industries estimates that Chinese factory workers make around 1,000 yuan a month in the Pearl River Delta and about 850 yuan at home, a difference offset by the lower cost of living and the elimination of traveling expenses. Many hard-line industries have moved to interior provinces, while apparel — with its need for fast turnover and quick shipments — continues to be based in areas close to China's coastline.Henry Tan, chief executive officer of Luen Thai, which had an estimated sales of $700 million last year, said factories in the south are already closing.

"The Hong Kong papers are talking about 10,000 factories shutting their doors," Tan said. "It may be exaggerating a bit, but not too much. There are a lot of smaller factories shutting down. Overall, the shortage of workers isn't bad, but the industry is moving. Part of that is the result of the [yuan] appreciating, the minimum wage going up and new labor laws that will increase costs. It's all political workings."

Yet another issue is quotas that are set to disappear at the end of this year. With quotas on Chinese-made textiles in place, many of Hong Kong's sourcing companies set up shop in Central America, the Indian Subcontinent and Southeast Asia. The question is if they will move back to China once quotas are gone.

As Rockowitz put it, "Manufacturers are happy with these countries as an alternative to China, but nothing has the scale of China and no one country can duplicate it. As soon as U.S. restrictions go away, you'll see a huge boom again in both foreign investment and local investment in building factories in China."

While Luen Thai's Tan didn't speculate on future investments, he does expect new trade agreements to be reached.

"Just as China has worked out a monitoring agreement with the EU, we expect a similar arrangement with the U.S.," Tan said. "Despite all the talk, the Chinese government is going out of its way to address trade discrepancies in exports."

But across the board, Hong Kong's sourcing companies are paying as much attention to the U.S. economy as they are to China's evolving manufacturing industry. The depreciation of the U.S. dollar and rising commodities costs are squeezing retailers.

"Our customers are having a difficult time in the current environment and they have to do a lot of discounting," said Rockowitz. "Price has become very, very important. For [the previous] three or four years, the talk was all about value, but most retailers are coming to us to get better prices somewhere around the world. If China is expensive, then we are in every other country."He noted that the pressure on retailers and consumers is building.

"Maybe it's not a recession technically, but from a consumer point of view, it feels like recession," he said.

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